Article # 5 STRAND: Marketing Challenges, Approaches and Distribution

Ontario Premier Dalton McGuinty and Samsung CEO Chi Sung Ha shake hands in January on a $6.7 billion deal for the Korean company to supply renewable energy equipment to the province.

Mark Blinch/Reuters

Tim Armstrong

On Thu Sep 23 2010 

Is Ontario’s goal of becoming the leading source for green energy equipment and services in jeopardy?

In January, the government announced a $6.7 billion wind and solar power investment commitment by a South Korean consortium led by the giant Samsung Group. Samsung is committed to developing wind and solar farms in southern Ontario, as well as manufacturing renewable energy equipment of all kinds for the domestic and export markets. These combined activities are estimated by the government to result in 15,000 additional Ontario jobs.

What attracted Samsung, which is said to have been courted by a number of competing U.S. states? Partly the guaranteed energy rates under the Green Energy Act, significantly higher than those offered by competing jurisdictions. And partly by promised subsidies for the Samsung manufacturing plants, estimated at approximately $400 million. In addition, to the chagrin of local contenders, Samsung is given priority access to our energy grid for approximately 2,500 megawatts.

To further enhance Ontario employment, provision is also made for a stipulated percentage of the goods produced in Ontario facilities to have Ontario content.

Unless you are a local bidder bumped from your previous priority position for access to the energy grid, it all sounded great, for jobs, the environment and for global trade.

But two problems, both involving complex World Trade Organization trading rules — and neither raised at the time of the initial announcement — are cause for serious concern.

The first involves Japan, and its complaint that the local content and subsidies provisions of the Ontario/Samsung deal contravene various WTO prohibitions.

Are the Ontario provisions consistent with the WTO’s Trade Related Investment Measures (TRIMS) and its Agreement on Subsidies and Countervailing Measures? The former explicitly prohibits developed economies from imposing local content requirements on goods manufactured for export. Some argue that the Ontario legislation is justified since it involves “government procurement.” But Japan’s complaint extends beyond government procurement and involves the production by private companies of green energy equipment and supplies for export.

Alternatively, are the subsidies justifiable since they originate in subnational (provincial) rather than national (federal) legislation? If not, are there alternative defences?

The second issue concerns China and its increased efforts to expand its dominance in the global green energy supply sector. So far, China’s practices in the sector have not been formally challenged. Recently, however, the United Steelworkers filed a 5,000-page submission to the U.S. trade representative, requesting the U.S. government to file a formal WTO complaint. The particulars were outlined by the Steelworkers’ international president, our own Leo Gerard, in a scorching interview on CBC. Gerard claims that China, by contravening a series of its international trade obligations, is making it virtually impossible for any North American jurisdiction, including Ontario, to compete in the clean energy supply sector.

China, already producing about half of the world’s solar panels and wind turbines, has achieved and maintained its advantage by heavily subsidizing its manufacturers (many of which are state-owned), favouring those with superior export performance, as well as those using Chinese-made goods in the manufacturing process.

China has a unique natural advantage as well. It produces most of the world’s supply of rare earth materials required in the manufacture of wind turbines, solar panels and advanced batteries. And to maintain its competitive advantage, it has, according to Gerard, placed illegal export quotas on those minerals, as well as a Byzantine regimen of taxation and licensing requirements, all said to be contrary to its WTO obligations. Gerard also refers to China’s illegally managed and overvalued currency and its underpaid, exploited workforce, enabling the country to undercut virtually all global competitors in pricing its exported green energy equipment.

The Steelworkers’ complaints are echoed by several U.S. states, which, like Ontario, are attempting to establish green energy supply capabilities. Oregon, for example, says that despite its own controversial business energy tax credit, it cannot hope to compete in this key sector so long as China is permitted to “tilt the playing field” in the manner outlined in the Steelworkers’ complaint.

IF ALARM BELLS have been sounded at Queen’s Park or in Ottawa, I haven’t heard them. If key elements of the Samsung agreement are found to contravene our WTO obligations, what then? Is the agreement still operable? Does cancellation, amendment or delay in implementation result in forfeiture penalties?

In light of the Japanese complaint and China’s allegedly insuperable and so far unchallenged competitive advantages, these matters need to be fully and transparently addressed.

Tim Armstrong is a lawyer whose assignments in the Ontario government included deputy minister of industry and trade and agent general for the Asia-Pacific region.

ANALYSIS: Is Ontario’s goal of becoming the leading source for green energy equipment and services in jeopardy? Mark Blinch/Reuters, September 23, 2010, The Toronto Star

Ontario's goal to becoming the biggest source for green equipment is endangered when Japan accuses Ontario of violating WTO’s Trade Related Investment Measures (TRIMS) and its Agreement on Subsidies and Countervailing Measures. What that does is not allow developed economies to impose local content requirement on goods manufactured for export. But apparently, some say that in Ontario its justified since the equipment and such originates in a subnational rather then national legislation. Another issue brings China into the picture, and China already produces half the world's wind turbine energy and solar panels. It is the most naturally fit and has yet to be competed with. It is unclear whether the Samsung Agreement with Ontario will be operable, or even cancelled as of now.

Strands that relate:

 A strand that relates to this article is the "Marketing challenges, Approaches and distribution", because Ontario's first challenge is to get past the issue with the legislation before it can even prove itself to be the second most significant green equipment contributor. The second strand this relates to is the "Factors influencing success in international market" because it is important for Ontario to be "fit" or approved by the WTO before it receives the go ahead. So rules and government policy plays a factor in businesses like this.

Thoughts and Opinions:

This issue should be sorted out as soon as possible, and should be done so Ontario can be a green equipment contributor too. Since it follows the subnation legislation it shouldn't fall under the same category as nation legislation, making it a sort of loophole. Overall, Ontario should become a green contributor as it would bring more recognition to Canada like it has to China. If China can supply half of the world, Canada should at least be able to do a quarter of that. Samsung also favors Ontario over some of the states in the United States that are also suitable candidates.